Value Added Tax (VAT) and Advance Income Tax (AIT) deduction procedure from contract price.

Calculation of Value Added Tax (VAT) and Advance Income Tax (AIT) from contract price is a tricky task and frequently we do mistakes in deducting VAT and AIT. Suppose you konw the total contract price including VAT and AIT. Now the questions arise: i) whether VAT or AIT will be deducted first, ii) whether there will be any VAT on AIT and vice versa. So what is the exact procedure for calculating VAT and AIT? Let us discuss different scenario regarding VAT and AIT deduction.

How to calculate Value Added Tax (VAT) and Advance Income Tax (AIT):
According to principle of VAT, VAT is payable by the buyer on the amount charged by the seller. So VAT is applicable on the amount of sale i.e. contract price excluding VAT but including Income Tax. On the other hand, income tax is payable by the seller on his net income i.e. selling price excluding VAT. But the contract between the buyer and seller are done in different conditions. In practice, the Contract Price may include or exclude either or both of the VAT and AIT. Thus we shall get four different scenarios for calculation of VAT and AIT. Those are as follows:
Scenario 1: Contract price excludes VAT and AIT
Scenario 2: Contract price includes both VAT and AIT
Scenario 3: Contract price includes AIT, but excludes VAT
Scenario 4: Contract price includes VAT, but excludes AIT

Let us now discuss how to calculate VAT and AIT for the above mentioned four different scenarios.

Scenario 1: Contract price excludes VAT and AIT

A) Contract price excluding VAT and AIT = 100.00 Taka
B) AIT % = 10.00 %
C) Contract price including AIT but excluding VAT = A/(1-B/100) = 111.11 Taka
D) AIT amount = (C-A) = 11.11 Taka
E) VAT % = 15.00 %
F) VAT amount = (C * E/100) = 16.67 Taka
G) Contract price including VAT and AIT = (C+F) = 127.78 Taka

Scenario 2: Contract price includes both VAT and AIT

A) Contract price including VAT and AIT = 127.78 Taka
B) VAT % = 15.00 %
C) VAT amount = A*B/(100+B) = 16.67 Taka
D) Contract price including AIT but excluding VAT = (A-C) = 111.11 Taka
E) AIT % = 10.00 %
F) AIT amount = (C * E/100) = 11.11 Taka
G) Contract price excluding VAT and AIT = (C+F) = 27.78 Taka

Scenario 3: Contract price includes AIT, but excludes VAT

A) Contract price including AIT, but excluding VAT = 111.11 Taka
B) AIT % = 10.00 %
C) AIT amount = (A * B/100) = 11.11 Taka
D) Contract price excluding VAT and AIT = (A-C) = 100.00 Taka
E) VAT % = 15.00 %
F) VAT amount = (A*E/100) = 16.67 Taka
G) Contract price including VAT and AIT = (A+F) = 127.78 Taka

Scenario 4: Contract price includes VAT, but excludes AIT

A) Contract price including VAT, but excluding AIT = 116.67 Taka
B) AIT % = 10.00 %
C) AIT amount = (A*E/100) = 11.11 Taka
D) Contract price including VAT and AIT = (A-C) = 127.78 Taka
E) VAT % = 15.00 %
F) VAT amount = (A * B/100) = 16.67 Taka
G) Contract price excluding VAT and AIT = (A+F) = 100.00 Taka

In conclusion, we may infer that contract price which includes AIT but excludes VAT is the basis for calculation of both VAT and IT. As shown in Scenario 3, we can calculate VAT and AIT directly by applying VAT / AIT rate when we know contract price including AIT but excluding VAT.

Still not convinced and have confusions? Simply download our VAT-AIT Calculator for free! It is developed using Microsoft Excel and very simple to use.

See also: VAT deduction system for Bangladesh